Technical Notes for ‘Planning for Future Rate Hikes…’


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This is a short appendix for our earlier post, “Planning for Future Rate Hikes: What Can History Tell Us that the Fed Won’t?,” presented in Q&A format.

I don’t understand the calculations in your charts – can you walk me through one of the figures?

Sure, we’ll do this for the figure depicted by the first bar (6.1%) on the real fixed investment chart:

rate hikes 9

We start by isolating all 4 quarter periods over which the fed funds rate dropped by more than 2%. There were 37 such periods in our data set, as shown in the first chart of the main article. For each of these periods, we record the growth in real fixed investment over the next 4 quarters. This is what we mean by lagged growth – we’re lagging the economic outcome against the change in interest rates.

So, for example, if the fed funds rate fell by 2.0% from the fourth quarter of 1959 to the fourth quarter of 1960 (it did), then we’re interested in real fixed investment growth from the fourth quarter of 1960 to the fourth quarter of 1961 (which was 6.5%).

Once we’ve recorded the lagged growth in real fixed investment for all 37 periods over which the fed funds rate dropped by more than 2%, we calculate the median across those data points. This is the 6.1% figure depicted by the chart’s first bar.

Are you always comparing 4 quarter rate changes to 4 quarter economic outcomes and 8 quarter rate changes to 8 quarter economic outcomes?

That’s right, all of the blue bars represent 4 quarter periods for both rate changes and economic outcomes, and all of the red bars represent 8 quarter periods for both rate changes and economic outcomes.

Where can I find your data?

Here’s a list, with links to the original sources:

  • Fed funds rates are sourced from the St. Louis Fed’s database.
  • Real fixed investment and real GDP growth are sourced from Table 1.1.3 of the National Income and Product Accounts.
  • S&P 500 earnings and returns are sourced from Robert Shiller’s database and updated from Standard and Poor’s website.
  • For inflation (used to convert nominal figures to real), we use the headline CPI maintained by the Bureau of Labor Statistics.
  • Unemployment rates are also sourced from the BLS.
  • For house prices, we combine the seasonally adjusted S&P/Case-Shiller 20 City Home Price Index with earlier data that was compiled by Robert Shiller and used in his book, Irrational Exuberance.
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